Token Sale: The new cool kid on the block
Blockchain has become the new playground for the innovative disruptor as well as for those pursuing a greater purpose and who are looking to change the world for the better. As we have discussed in previous posts, the potential offered by blockchain technologies seems immense, from the revolutionizing of the financial industry to the overhauling of the art and luxury markets. The technical elegance and sophistication is thrilling.
2017 has witnessed a meteoric rise in the number of blockchain-based start-ups as well as established companies adopting the technology. We don’t expect to see any slow-down in 2018 and this extraordinary growth has consequently opened the floodgates for investments into blockchain companies.
Venture Scanner (2017): Blockchain Tech. Funding by Year
Alongside the traditional route of financing blockchain companies through angel & venture capitalists and private investors, the rising popularity of cryptocurrency and its gradual acceptance by the traditional financial markets has revealed a far more viable, scalable and as yet largely unregulated solution for funding. A solution that truly fits these companies’ underlying technology and ethos of decentralization, tokenization, and democratization: Initial Coin Offerings (ICOs) aka Token Sales.
It all started in 2016, with the famous ERC20, an open source model for how developers can create their own tokens or cryptocurrencies on the Ethereum blockchain. Since then and in lockstep with the general hype of blockchain and crypto-mania, Token Sales have become the hottest new trend, maturing from an unknown, ‘geekish’ fundraising method within the blockchain community into a widely accepted form of financing blockchain companies. So what are the underlying pillars of these Token Sales that make them so successful?
So far and largely due to the hype and frenzy, Token Sales have been easy to pull off, requiring little more than a team with entrepreneurial spirit, technological know how and an ambitious plan — the so-called white paper — comprising the problem the platform is out to solve, team structure, development roadmap and the planned use of funds.
Some tokenization and blockchain models have made significant progress in catching up with mature and established companies such as American Express, Microsoft and IBM.
Return on investments have turned out to be very profitable for Token Sales, with NXT (ROI of 7’383’114%), IOTA (ROI of 869’087%) and Ethereum (ROI of 241’149%) leading the field of successful Token Sales.
In simple terms, a Token Sale is a fundraising event where technologists and entrepreneurs raise money by issuing and selling their own tokens or cryptocurrency in return for an investment. The smart piece is that this fundraising is a crowdfunding event on a decentralized blockchain, typically Ethereum, and offers a fully democratic solution, open to almost everyone. In fact, a token is quite similar to a share in a company but without many of its characteristics. For example, unlike equity-owners, token holders generally hold no claim on an issuer’s future earnings. The money raised from the tokens is used to build new blockchain-related projects and the holders of the tokens can usually trade, spend and use them on the platform.
According to Business Insider and other publications, the Token Sales market is soaring, having raised between $4–5 billion in 2017. And its recent success is demonstrated by investment inflows akin to those reaching internet startups from early stage venture capitalists, as the following chart depicts.
CB Insights (2017): Tech Equity Funding vs. ICO Funding
According to Forbes, this trend is unlikely to change in 2018.
„The year 2018 is gearing up to be the year where institutional money begins to move into cryptocurrencies and ICOs at a much quicker pace…expect to see ICOs continue to gain traction and dominate the landscape for blockchain-based companies trying to raise funds in 2018.“
In our next blogs, we will drill down into the detail of the Token Sale, its advantages and challenges, as well as the different kind of tokens (security vs utility tokens). Stay tuned!
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